As lira hits record lows, Turkey's Erdogan cites attack on economy

ISTANBUL (Reuters) - The Turkish lira sank to record lows on Wednesday, battered by investor concern about monetary policy and inflation, a sell-off that President Tayyip Erdogan dismissed as an economic attack by enemies of the state.

The lira, one of the worst-performing emerging market currencies this year, has hit record lows for the last five trading days. It has also been pressured by a rouble sell-off and by the possibility of a U.S. missile strike on Syria. Russia, Syria’s main ally, is a major trading partner of Turkey.

Investors say the bulk of Turkey’s problems are homegrown, pointing to worries that Erdogan has excessive influence on monetary policy. A self-described “enemy of interest rates”, he has repeatedly called on the central bank to lower rates to boost growth, even though inflation in running at double digits.

The bank’s reluctance to tighten policy - it held rates steady at its last two meetings - has only increased the perception that it is under political pressure.

“The markets at the moment really want to see a rate hike by the central bank, as a sign that it is still a credible institution; that it’s taking its inflation targeting somewhat seriously and that it is prepared to stand up to government pressure,” Capital Economics senior emerging markets economist William Jackson said.

The lira hit an all-time low of 4.1944 against the dollar, a depreciation of 9.4 percent this year. Against the euro, it fell to a record low of 5.1914.

It recouped some losses and was trading at 4.1525 against the dollar by 1340 GMT, after Prime Minister Binali Yildirim said the central bank would take “necessary measures”.

HANDS TIED

“The central bank is responsible for monetary policy... it took the necessary measures until now, and it will continue to do so,” Yildirim said in a speech. He did not elaborate on what the measures might entail.

Data released on Wednesday showed the current account - a broadly defined measure of trade that includes services and investment income - recorded a deficit of $4.152 billion in February.

That was less than the $4.2 billion forecast in a Reuters poll, but a more than 60 percent increase from the same period a year earlier. One analyst said it affirmed Turkey’s vulnerabilities on the balance of payments front.

“(It) underlines the challenges for the CBRT (central bank) in managing the lira when Erdogan has tied both hands behind its back in terms of limiting its ability to hike policy rates,” Bluebay Asset Management strategist Timothy Ash said.

The central bank holds its next rate-setting meeting on April 25. Anything less than a decisive rate hike is likely to put further pressure on the lira, analysts have said.

Erdogan characterised the sell-off as an attack by Turkey’s enemies, an argument that resonates with many of his supporters.

“There are games being played on our economy,” he said in a speech in Ankara. “I call to those attacking our economy: You will not succeed. Just like you failed before, you will fail again.”

Such commentary is unlikely to help investor sentiment, Capital Economics’ Jackson said.

“If it’s described as an attack on the economy, it suggests that there’s not a discussion about what might need to change in terms of monetary and fiscal policy,” he said.

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The cost of insuring Turkish debt spiked to a 4-1/2 month high, while dollar bonds fell across the curve.

Turkish five-year credit default swaps rose to 215 basis points (bps) according to data from IHS Markit, the highest level since mid-November, and up 6 bps from Tuesday’s close.